Chavez signs new currency law against speculation

Venezuela's President Hugo Chavez on Sunday signed a new foreign exchange law intended to strengthen the bolivar currency, but critics say it will backfire and hurt the economy.

The law will come into effect when it is published in the government's Official Gazette.

Details are still hazy, but Chavez said his finance minister and the president of the central bank might hold a press conference on Monday to explain the new system. Monday is a bank holiday in Venezuela and markets are closed.

Chavez is also clamping down on illegal money changing, with a series of raids and the arrest of one man who ran a website listing the bolivar's price.

He has threatened to close down all finance trading houses and brokerages if they do not play by the rules.

We have changed the law and started the raids, Chavez said. It's robbery. You take a dollar that is officially worth 2.6 or 4.3 and you sell it ... at 8 or 10. It's robbery and everyone should report it, he said on his weekly television show.

The socialist leader, who has attracted over 300,000 followers on Twitter since he joined a few weeks ago, said Venezuelans should report illegal dollar trading to him via the micro-blogging service.

Under the new rules, the central bank will decide which brokerages can participate in the foreign exchange market where the bolivar has until now been freely floated.

It is called the parallel market because it operates alongside two fixed rates for the bolivar of 2.6 and 4.3 per dollar -- set by the government in a devaluation in January.

The 2.6 rate is for importing food and medicine and the 4.3 rate is for turning oil dollars into bolivars and for importing items deemed non-essential.

Officials have said the central bank could be aiming to create a floor and ceiling price for the bolivar in the parallel market. Analysts say the band could be between 5-7 bolivars to the dollar.

Analysts have warned this strategy may backfire and create a fourth, illegal market for dollars and possibly hasten another devaluation by the government early next year. The bolivar was devalued from an official rate of 2.15 in January.

Chavez's threats to close down brokerages may be intended as a warning to traders not to begin operating in a black market if the central bank does not meet 100 percent of the requests for exchange.

The bolivar's woes are complicating a grim macroeconomic environment for OPEC member Venezuela which, despite its oil wealth, has rampant inflation and is expected to be the only economy in Latin America to contract this year.